State Treasury avoids problems in bond mess

Treasury reports some failed auctions for its bonds, but that has limited impact on its interest rates.

Jon Chesto

The interest rates that the state government pays for its debt have remained largely unaffected by a spike in rates among certain types of variable-rate bonds, according to a Treasury spokeswoman.

Alison Mitchell, spokeswoman for state Treasurer Tim Cahill, said about $500 million in state bonds, or only about 3 percent of the state's $19 billion debt portfolio, is tied to so-called auction-rate securities.

The state has seen a few failures in debt auctions within the past two weeks, but the interest rates on those affected bonds were reset in the ``4 percent range,'' Mitchell said. Those rates are only slightly higher than the rates in the 3 percent range that the state had been paying on the bonds, she said.

The state Treasury avoided the interest rate spikes that surprised many public agencies and nonprofit institutions around the country because it has taken an extremely conservative approach to managing the state's debt, Mitchell said.

Many other agencies weren't as lucky. For example, the Port Authority of New York and New Jersey saw the interest rate on its bonds jump from 4 percent to 20 percent earlier this month. The authority has since refinanced the debt to a lower rate.

The Bloomberg news service reported that the Massachusetts Turnpike Authority could end up paying as much as $300,000 a month in additional debt payments because of auction problems.

Some of the Massachusetts Health and Educational Facilities Authority's nonprofit clients have seen rates adjust from 5 percent to 10 percent, and from 3-plus percent to 12 percent, said Liam Sullivan, a spokesman for the agency.

The rate spikes illustrate just how far the problems in the subprime mortgage and broader credit markets have spread.

Auction-rate bonds' rates are adjusted at periodic auctions. Typically, the rates are lower than those on conventional long-term bonds.

But in recent weeks, many auctions have failed because bidders haven't shown up. When that happens, the rates on the bonds adjust upwards to pre-arranged ceilings spelled out in the bond documents.

Investors haven't been avoiding auction-rate bonds lately out of concerns about the health of the bond issuers. Instead, the auctions have failed over concerns about the weakened credit ratings of the bonds' insurers.

``Anyone who is an issuer who said, 'I'll do better with auction rates (and) my overall cost of debt is going to be lower' is now finding that, at least in the short run, they are not getting bids or are getting very unattractive bids,'' said Dianne Sales, a vice president at MFC Global Investment Management.

Sales, who is a fund manager with several John Hancock funds, said many bond fund managers won't buy bonds for their funds if the credit ratings on those bonds' insurers fall below a certain point.

Geoff Beckwith, executive director of the Massachusetts Municipal Association, said very few, if any, towns in Massachusetts have been affected by the interest rate spikes. But he said the problems insurers are facing could drive up bond insurance costs for cities and towns.

MassDevelopment spokesman Adam Bickelman said his agency is working with its nonprofit clients to make it easier for them to their refinance their adjustable bonds. The agency's board recently approved refinancing plans for bonds issued by Boston University, Bentley College, Brandeis University and Clark University.

About 8 percent of the bonds issued through MassDevelopment in the past five years, totaling about $664 million in debt, have been auction-rate securities, he said.

Jon Chesto may be reached at jchesto@ledger.com.

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